December 19, 2012
Whilst the media are obsessed with the black and white politics of a budget surplus the economic policy concern is that a high Australian dollar is here to stay for some time---even though the terms of trade are down around 15 per cent.
That means the structure of the economy is going to change. Some sectors of the economy will grow (the resources sector will have a larger share of the economy than it used to be), some will shrink (eg., in the trade-exposed industries) that’s what happens when relative prices alter in a market economy. It also means low interest rates (3 per cent rate which is very low by historical standards for Australia) to compensate for the high dollar.
That makes it difficult for economic growth to come from non-mining investment. Where would that growth come from, now that the mining sector is winding back, and the high dollar means a weak manufacturing sector?
The broad answer is by taking advantage of the opportunities Asian growth. Australia is in the right place at the right time. So where are the new growth drivers? Those in a digital economy? Those in the green economy from decarbonising the economy? The current position is who knows?
How about a good, old fashioned housing boom, due to the historically low interest rates? Monetary policy is pretty limited in its options, especially when the effect of fiscal policy (budget surplus) is to constrain economic growth.